Digital due diligence: business examination 4.0

Dr. Stefan Sambol

Digital business models are not only becoming overwhelmingly important for consumers, but to the same extent valuable for investors. Established consulting firms are facing challenges when it comes to questions around “digital,” and experts are needed. In this respect, due diligence projects are also undergoing a digital transformation. But what exactly does a digital due diligence entail?

Why perform a digital due diligence?

Due diligence is performed before the acquisition or sale of a company or other investment in order to assess and confirm that the investment is fit for acquisition. It is primarily undertaken on behalf of investors in order to provide them with adequate information to make an investment decision. A digital due diligence is therefore of interest to investors wishing to invest in companies or assets which have a digital presence and/or digital revenues and understand the potential to drive digital sales and EBITDA.

What is a digital due diligence in detail?

A digital due diligence focuses on the online business and potential of a company rather than its whole business including offline sales – there are several specific criteria that need to be assessed for this. Firstly, it needs to be understood what kind of online presence a company has; does it have website(s) and what are they being used for. For example, they might have an e-commerce website, selling directly on their website or it might be a marketing platform for gaining sales and leads. Businesses may also have a presence on third party websites (e.g. social media, marketplaces like Amazon or eBay etc.) which also needs to be analysed in detail.

A digital due diligence may uncover many findings that would not have been picked up in a classical commercial due diligence.

There are five main areas that need to be assessed

Market: How big is the digital market of the business and how is it developing? How present are marketplaces such as Amazon in the respective product categories? The digital size of the specific market and its future potential development needs to be assessed to gauge what the potential is of doing business in this industry online and what are the “realistic” growth opportunities. This can be assessed by on the one hand looking at market studies and on the other hand analysing the development of the search market online for paid and organic traffic. At OMMAX, we are able to quantify the number of searches (e.g. for products and services or brands) and translate these numbers into digital market shares of the respective business and its competitors.

Competition: What competition exists online and how strong is it? Establishing who the online competitors for a business are, how much market share they have and the development of this is crucial to understanding the market dynamics at large (which may differ drastically to offline) as well as assessing any potential growth or risks. Digital competitors can largely be broken into direct and indirect competitors. Direct competitors are businesses offering the same services online whereas indirect may not have a similar operation but compete for the same traffic as that of the business being analysed.

Business Overview: How is the business built up digitally? It is important here to understand what kind of IT setup a business has in terms of IT staff and IT roadmap, what software and technology they use and the server and hosting configurations to understand what risks there may be in a setup including any potential legal complications and evaluate the scalability of the business.

Digital Platform KPIs: What are the most important traffic sources and how do they perform? It needs to be understood how potential business is reaching the company, what the costs and performance of different channels are (organic, paid, direct, referral, social etc.) and in addition how brand awareness can affect this or can be affected by this. An e-commerce business, for example, might be assessed upon KPIs such as traffic, conversion rate, transactions, average order value, and revenue across different channels which can then be compared against costs to derive the value and performance of different measures. At OMMAX, we are able to benchmark the KPIs based on the industry and country in order to identify the potential, challenge the management business case and develop the future growth scenarios.

Customer Economics: Where a business is active in commerce online, the performance, profitability and behaviour of customers is also crucial to analyse. The most important KPIs to evaluate include customer cohorts and retention rates, customer lifetime revenues (CLR), customer acquisition costs (CAC) and customer lifetime values (CLV). By analysing this, profitability and sustainability of different client segments and markets can be understood as well as the time needed for customers to become profitable for the company after acquisition. It is not unusual that a company has trouble in order to run such calculations beacuse it requires the data from different sources over time. At OMMAX, we have developed our own business intelligence software solution in order to evaluate up to 1bn. data points and find answers quickly from complex datasets.

Why is digital due diligence vital in today’s market?

With ever more businesses developing a digital presence and the inevitable growth of the online world, it is becoming critical to fully understand the implications of the digital world on a business in order to increase the value of the company. Due to the different criteria and unique characteristics of the online world compared to the offline, a digital due diligence has become of increased importance and may uncover many different findings that would not have been picked up during a classical commercial due diligence process. That is why digital experts are needed in order to understand the core of e-commerce business and evaluate the potentials.

What kind of due diligence projects has OMMAX executed?

OMMAX has been responsible for a host of different due diligence projects. For example, in 2015 OMMAX advised a private equity firm over the acquisition of the leading bike apparel e-commerce shop in Germany, which ultimately led to the successful acquisition of the company. OMMAX has also worked on numerous digital due diligence for more complex deals such as the potential merger of six different e-commerce sports platforms in order to form a new cross-platform European-leading sports group in 2016. The areas of expertise have also varied with OMMAX successfully leading a digital due diligence on a transaction for the acquisition of an international e-commerce shop for replacement parts for kitchen appliances on a German based company who now have a European presence.

Mr. Sambol is a Managing Partner at OMMAX and advises multiple clients from different industries to successfully manage their digital transformation processes. Prior to OMMAX, Stefan Sambol gained experience in the digital field by developing new digital ventures for Rocket Internet AG where he was part of the Global Venture Development Team. He also spent several years in Management Consulting advising multiple clients in B2B and B2C.

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